A comprehensive guide for investors to understand what EPS means, how to calculate it, and how to choose stocks—must-have manual

In the stock market, investors who have never heard of EPS are essentially wasting their time.

With each quarterly earnings report, major news outlets are reporting “Company XYZ’s EPS exceeds expectations” or “EPS drops significantly,” but do you really understand what this signifies behind the numbers? Many retail investors get stuck at this step—seeing attractive figures and impulsively buying in, only to get caught in a downturn.

Today, let’s thoroughly explain EPS.

Why Do Investors Need to Understand EPS?

First, the conclusion: EPS directly impacts your stock selection effectiveness and returns.

EPS stands for Earnings Per Share, simply put, it’s the average profit earned per share. The higher the EPS, the more profit the company makes per dollar invested. This directly reflects how solid the company’s fundamentals are.

For example, over the ten years from 2013 to 2023, Apple (AAPL.US) EPS increased from over $5 to $6, while its stock price rose from over $60 to $150. EPS steadily increased, and the stock price naturally followed suit. Conversely, some companies’ EPS continued to decline; even if their stock prices rebounded temporarily, they ultimately faced long-term declines.

The key point is: EPS is not just a number; it is an intuitive reflection of a company’s profitability and a core factor in determining the Price-to-Earnings (P/E) ratio.

How Is EPS Calculated? One Formula Does It All

The formula is actually very simple:

EPS = (Net Profit - Preferred Dividends) ÷ Outstanding Common Shares

Explanation of numerator and denominator:

• Net Profit: Total revenue minus all expenses, found at the bottom of the income statement.
• Preferred Dividends: Dividends paid to preferred shareholders, listed separately on the income statement.
• Outstanding Common Shares: The actual number of common shares in circulation, available on the balance sheet.

In practice, companies usually directly report “Net Income attributable to common shareholders,” so you can just divide that figure by the number of shares issued—no need to subtract preferred dividends yourself.

For example, taking Bank of America (BAC.US) 2022 financials:

Step 1: Find the income statement

• Net Profit: $27.528 billion
• Preferred Dividends: $1.513 billion

Step 2: Find the weighted average number of shares

• Shares outstanding: 8.1137 billion

Step 3: Apply the formula

• EPS = ($27.528 billion - $1.513 billion) ÷ 8.1137 billion = $3.21

This matches exactly with the reported EPS.

Where to Check EPS? Two Main Routes

Route 1: Official Financial Reports (Most Accurate)

Using Apple as an example:

1. Visit the U.S. Securities and Exchange Commission website sec.gov
2. Enter the stock ticker “AAPL”
3. Find the quarterly (10-Q) or annual (10-K) reports
4. Open the financial statements and locate the EPS line in the income statement

This is the most official and accurate method, with zero errors.

Route 2: Financial Websites (Fast but Require Discretion)

Websites like SeekingAlpha, Yahoo Finance, etc., also provide EPS data, but there’s a caveat: these sites display various types of EPS—basic EPS, diluted EPS, forecast EPS, TTM EPS (trailing 12 months). You need to know which one you need.

Generally, basic EPS is most commonly used. However, these sites scrape data, which can sometimes be inaccurate. The safest approach is still to check the official financial reports.

Basic EPS vs Diluted EPS: What’s the Difference?

Financial reports usually show both:

Basic EPS = (Net Profit - Preferred Dividends) ÷ Current Outstanding Shares

Reflects the current real situation.

Diluted EPS = (Net Profit - Preferred Dividends) ÷ (Current Outstanding Shares + Potential Shares from Convertible Securities)

This is a hypothetical scenario: if all stock options, convertible bonds, and convertible preferred shares are converted into common stock, what would the EPS be? Diluted EPS accounts for potential dilution of earnings.

Why look at Diluted EPS? Because these potential shares, once converted, increase the denominator, lowering EPS. Investors need to understand the worst-case scenario.

For example, Coca-Cola (KO.US) has 22 million convertible securities. When calculating diluted EPS:

• Diluted EPS = $9,542 million ÷ (4,328 + 22) million shares = $2.19

While basic EPS might be over $2.20, fully diluted EPS drops to $2.19. The difference may seem small, but for high-growth companies, this gap can be significant.

Investment insight: Basic EPS shows the current state, while Diluted EPS indicates potential risks. Both are important.

The Triangular Relationship Between EPS, Stock Price, and P/E Ratio

( The strength of EPS influences stock price movements

The general logic:

• Strong EPS → Investor confidence increases → Stock price rises → More optimism about the company → Customer confidence grows → Sales increase → EPS further rises → Stock price continues upward

This forms a positive feedback loop.

But there’s a pitfall: Market expectations are crucial.

For example, Nvidia (NVDA.US) reported in February. Despite a clear decline in Q4 performance, revenue and EPS beat Wall Street expectations, and the company was optimistic about future prospects. The stock surged 14% overnight.

EPS itself was declining, yet the stock price soared. Why? Because the market was more focused on the difference between actual EPS and expectations, not the absolute value.

Therefore, when using EPS for stock selection, consider:

• Actual EPS figures
• The deviation from market expectations
• Management’s future guidance

) The true tool for stock selection is the P/E ratio

P/E ratio = Stock Price ÷ EPS

This metric links a company’s fundamentals (EPS) with market valuation (stock price).

For example, if a company’s stock is $30 and EPS is $1, the P/E is 30.

If the industry average P/E is 10, it indicates:

• Investors are willing to pay 3 times more per dollar of earnings for this company
• The company either has particularly promising growth prospects or the stock is overvalued

Logic when screening by P/E:

• P/E below industry average by 30% → Relatively cheap, potential bargain
• P/E above industry average by 30% → Market expects higher growth, but verify if growth is sustainable

The relationship between EPS and Dividends

Per-share dividend (DPS) = Total dividends ÷ Number of shares

Dividend yield = DPS ÷ Stock price

Difference between EPS and DPS:

• EPS measures how much the company earns
• DPS measures how much profit is distributed to shareholders

A company with EPS of $10 but only pays $2 in dividends is reinvesting $8 for growth, indicating confidence in future expansion.

Conversely, a company with EPS of $5 but paying $4 in dividends has a high dividend yield, possibly signaling limited growth opportunities and a preference to return cash to shareholders.

In bear markets, many investors prefer high-dividend-yield stocks for steady cash flow. But beware: If a company pays high dividends while EPS declines, this high yield may not be sustainable.

Common Pitfalls in Using EPS for Stock Selection

Pitfall 1: Only look at absolute value, ignore trend

“Company A’s EPS is 0.5, while Company B’s is 1.0, so B is better?”—a common mistake among beginners.

Focus on the long-term trend of EPS. A company whose EPS grows from 0.1 to 0.5 (a 400% increase) is more promising than one growing from 1.0 to 1.1 (only 10%).

Pitfall 2: Being misled by stock buybacks

Many companies repurchase their own shares. After buybacks, the number of shares decreases, which can artificially boost EPS if profits stay the same.

For example:

• Company profits $1 billion, 1 billion shares outstanding → EPS = ###- Company repurchases shares, reducing to 800 million shares, profits still $1 billion → EPS = $1.25

EPS “increases” by 25%, but the company’s actual profitability hasn’t changed. Many investors are fooled by this trick.

Solution: Look at adjusted EPS or compare revenue growth; don’t rely solely on EPS figures.

Pitfall 3: One-time items distort the numbers

Companies may sell assets, receive tax benefits, or exclude losses from certain operations, affecting profits.

For example, Yum! Brands (YUM.US) decided to exit Russia, which impacted 2022 profits. These are non-recurring events.

If you only look at reported EPS, 2021 might seem better. But after removing these one-time effects, the ongoing EPS in 2022 could be stronger.

Therefore, consider both:

• Reported EPS (GAAP EPS): official figure
• Adjusted EPS (Non-GAAP or normalized EPS): excluding one-time items

$1 Pitfall 4: Comparing peers requires caution

For instance, Qualcomm (QCOM.US) appears to have much higher EPS than Nvidia (NVDA.US) and AMD (AMD.US).

But from 2020 to now, Nvidia’s stock has surged 251%, while Qualcomm’s only increased 69%.

EPS is just a reference, not everything. Also consider:

• Industry outlook (which chip segment is hottest)
• Company competitiveness (market position)
• Growth potential (future EPS expansion)

How to Use EPS for Practical Stock Selection

Step 1: Filter basic criteria

Find companies with EPS growth over 3 consecutive years. Criteria:

• Annual EPS growth rate of 15%+ → Excellent
• 5-15% → Acceptable
• No growth or decline → Avoid

Step 2: Compare P/E ratios

Compare candidate companies’ P/E with industry average:

• P/E 30% below industry average → Relatively cheap
• P/E 30% above industry average → Premium, verify growth prospects

Step 3: Examine adjusted EPS

Identify impacts of special items, determine if they are one-off or ongoing.

Step 4: Benchmark against peers

Not just compare EPS size, but also growth rate and P/E:

• Target company’s EPS growth vs industry average
• Target company’s P/E vs industry average
• Combine these to assess valuation and growth potential

Can EPS Be Used to Predict Stock Movements?

Yes. Wall Street analysts forecast future EPS based on company financials, industry trends, and macro factors.

Looking at Apple’s EPS forecasts for 2023-2024, the market consensus is clear. When actual EPS significantly deviates from forecasts, stock prices often experience sharp swings.

This is why many professional investors pay close attention to “EPS surprises”—the magnitude of EPS beating expectations—as it’s a key driver of stock volatility.

Final Words

What does EPS mean? It’s how much money each share earns.

But “how much money” varies in different market environments and stages of company development. Mature companies focus on EPS stability and growth; growth companies emphasize growth rate; value stocks look for low P/E ratios.

The core logic of using EPS for stock selection:

• Assess profitability through EPS → Evaluate valuation via P/E ratio → Make final judgment considering industry outlook and competitive advantage.

It’s not about buying just because EPS is high or selling because EPS is low. Otherwise, you’ll likely get educated by the market.